- European Central Bank council member Axel Weber said cutting the bank’s benchmark interest rate below 1 percent risks bringing the interbank money market to a standstill. (Bloomberg)
Key Reports (WSJ):
7:00 a.m. Mortgage Application Refinance Index: Previous: +3.2%.
8:30 a.m. Mar Consumer Price Index: Expected: -0.1%. Previous: +0.4%.
8:30 a.m. Mar Consumer Price Index, ex-food energy: Expected: +0.1%. Previous: +0.2%.
8:30 a.m. Apr Empire State Fed Manufacturing Survey: Expected: -35.5. Previous: -38.23.
9:00 a.m. Feb Tsy International Capital: Previous: -$60.9B.
9:15 a.m. Mar Industrial Production: Expected: -0.9%. Previous: -1.5%.
9:15 a.m. Mar Capacity Utilization: Expected: 69.6%. Previous: 70.2%.
10:30 a.m. U.S. Energy Dept Oil Inventories For Apr 10
1:00 p.m. Apr NAHB Housing Index: Previous: 9.
2:00 p.m. Federal Reserve Beige Book
"It’s income tax time again, Americans: time to gather up those receipts, get out those tax forms, sharpen up that pencil, and stab yourself in the aorta."
FX Trading – Deflation bite!
The risk appetite trade was progressing nicely until news of US deflation hit the wires. Maybe now those so-called analysts who believe inflation is solely about money will finally see the light. Nahhh….
The reason I say that is because I watch the parade of people on stage often at seminars where I speak. Most simply mouth the line that inflation is a monetary phenomenon and because the government has monetary spigots working 24/7 there MUST be inflation. “It has to be,” is there lament. Well, as all things in the economic world it doesn’t have to be.
Back to French economist Frederic Bastiat for help, “That Which is Seen, and That Which is Not Seen,”…
In the department of economy, an act, a habit, an institution, a law, gives birth not only to an effect, but to a series of effects. Of these effects, the first only is immediate; it manifests itself simultaneously with its cause – it is seen. The others unfold in succession – they are not seen: it is well for us, if they are foreseen. Between a good and a bad economist this constitutes the whole difference – the one takes account of the visible effect; the other takes account both of the effects which are seen, and also of those which it is necessary to foresee. Now this difference is enormous, for it almost always happens that when the immediate consequence is favourable, the ultimate consequences are fatal, and the converse. Hence it follows that the bad economist pursues a small present good, which will be followed by a great evil to come, while the true economist pursues a great good to come, – at the risk of a small present evil.
The armchair inflation analysts see money supply.
They don’t see credit destruction from trillions in toxic paper and bad loans, for credit doesn’t seem to enter the mindset of the average money supply analyst. And the armchair analyst doesn’t either see, or give much weight to, a thing called monetary velocity.
Effectively, monetary velocity measures the simulative effect of money. Think of it as the multiplier coupled with money supply; together they tend to help us see real spending hitting the real economy i.e. real money chasing real goods. If money velocity falls, as it does during recession (and as you can see in the chart above), it tends to neutralize the increase in money supply.
This is no normal recession, savings are being built as highlighted in yesterday’s quotable from Stephen Roach:
“Fortunately, the American consumer is smarter than the quick-fix Washington mindset. Shell-shocked families — especially some 77 million baby boomers for whom retirement planning is an urgent imperative — know they have no choice other than to save. The personal saving rate has risen from 0.8 percent to 4.2 percent in the past six months alone, and is on its way to a new post-bubble equilibrium that I would place in the 7.5 percent to 10 percent zone.”
Though we are not economists, nor pretend play one when on TV, we think this increased level of savings will tend to suppress the monetary velocity in the US economy for longer than expected and thus dampen inflation for longer than expected.
Though banks are getting the money…
..but they aren’t lending to real people…many don’t want it, and those that do are being rejected. Thus, credit, which is effective the demand for money to be spent on real goods, is also pressing down on the hopes and dreams of armchair money supply inflation theorists everywhere.
Will the weight of all this money one day hit the proverbial fan?
Maybe? But we think inflation fears are way over played until the US and global economy start to normalize.
Tomorrow we get a look at China’s GDP. What we haven’t factored into this discussion about inflation vs. deflation is the idea that in order to maintain some semblance of an export machine, China could effectively push down further the cost of final goods prices, which again plays into the deflation argument.
Central banks are worried. Otherwise why would they all be heading toward ZIRP (Zero Interest Rate Policy)? It worked so well for Japan, why not!
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